Unit 6 - Life Insurance Policy Options

Question 1

What are the Settlement Options?

Answer 1

• Lump sum
• Interest Only Option
• Fixed period option
• Fixed amount option
• Life Income Option
• Life with period certain
• Life with refund certain
• Joint and Survivor Life

Question 2

Interest Income (only) settlement option

Answer 2

The insurer retains the death benefit and pays a stated amount of interest on the money.

Question 3

Fixed Period Option

Answer 3

Will pay both an amount of principal and interest to the bene over a certain stated period of time.
- If the primary bene dies before all of the proceeds are paid out the remainder of the money will be paid to the contingent that was named in the policy.

Question 4

What are the three factors used to calculate each payment for Fixed Period Option?

Answer 4

1. Amount of death benefit,
2. A guaranteed interest rate; and
3. The length of the chosen period.
   * if interest is greater than the guaranteed rate, final payment will be larger.

Question 5

Fixed Amount Option

Answer 5

The proceeds will be paid out in a fixed amount over time until both the principal and interest have been completely paid to the bene.

Question 6

What are the three factors used to calculate each payment for Fixed Amount Option?

Answer 6

1. Amount of death benefit;
2. A guaranteed interest rate; and
3. The chosen payment amount.
   * if interest exceeding the guaranteed rate is earned, the money will last longer than expected.

Question 7

Life Income Option

Answer 7

The policy bene will be guaranteed to receive an income for the rest of their life, regardless of how long that may be.

Question 8

How is the amount paid on Life Income Option determined?

Answer 8

• policy death benefit
• life expectancy of the bene, their age and gender.

Question 9

Life Only or Straight Life Option

Answer 9

Will pay the largest amount to the bene for as long as they live, regardless of how long that may be.

Upon their death no futher payments are made.

Question 10

Life with Period Certain

Answer 10

Also pays an income for as long as the bene is alive, however the bene selects a payment period, typically 5, 10, or 20 years can be chosen and payments are guaranteed to be made for a least that number of years.

If the bene dies before the end of the selected period, payments continue to another person for the rest of the payment period.

Question 11

Life with Refund

Answer 11

Pays an income for as long as the bene is alive, but also guarantees total payments will be at least the amount of the death benefit.

If the bene dies before the total of payments equals the death benefit, the balance is paid to another person.

Question 12

Joint and Survivor Life Settlement Option

Answer 12

Continues paying as long as either bene lives. After the death of the first bene, the same or reduced payment amount is paid to the survivor.

Selecting a reduced payement for the second bene will allow a larger payment while both are alive.

Question 13

With Joint and Survivor Life Option, what are the same or reduced payment amounts?

Answer 13

100%

75%

66 2/3%

50%

Question 14

What is a Policy Loan Provision?

Answer 14

Permanent Life Insurance policies have two components, the death benefit or face value and cash value - the savings element funded by a portion of the premium.

If the policyowner needs cash but doesn’t want to surrender the policy, they can access the cash value.

Question 15

What are the main advantages of a policy loan over other loans?

Answer 15

• No credit check
• Interest rate is usually much lower
• Can pay back according to any repayment schedule
  
  • not even legally obligated to pay back the loan

Question 16

If a policy loan is taken and death occurs how does that effect the payout?

Answer 16

If death occurs while the loan is outstanding, then the insurance proceeds are reduced by the amount of the loan outstanding plus interest.

Question 17

What happens if the policy loan and accumulated interest exceeds the cash value of the policy?

Answer 17

it lapses

Question 18

What is an Automatic Premium Loan Provision?

Answer 18

If the insured fails to pay the policy premium by the end of the grace period, then the insurer will pay the premium with a policy loan and will continue to do so until the cash value of the policy falls below the premium amount, in which case the policy lapses.

Question 19

What policy is a Withdrawal allowed?

Answer 19

Withdrawals or partial surrenders are allowed on Universal Life insurance policies but not Whole Life policies.

Question 20

How does a Withdrawal affect the policy?

Answer 20

• Will result in a reduction of the cash value and death benefit amount
• May be subject to a pro-rata surrender charge and or processing fee
• Cannot be repaid

Question 21

What is a Participating Policy?

Answer 21

Life insurance policies that pay policy dividends.

Question 22

What is a Nonparticipating Policy?

Answer 22

Life policies that do not pay policy dividends

Question 23

Are Policy Dividends taxable?

Answer 23

No, because they are a return of a portion premium.

Question 24

Dividend Options

Answer 24

Cash

Accumulation of Interest

Reduced Premium

Paid Up Additions

Paid Up Insurance

One Year Term Insurance at attained age

Question 25

Dividend Options - Cash

Answer 25

The insurer can send a check to the policy owner in the amount of the dividend

Question 26

Dividend Option - Accumulation of Interest

Answer 26

The dividend can be left with the insurer to earn interest in the savings account.

The dividend is not taxable, but the interest credited to the account is taxable.

Question 27

Dividend Option - Reduced Premium

Answer 27

The dividend can be applied and reduce the next premium due

Question 28

Dividend Option - Paid Up Additions

Answer 28

Uses each annual dividend to purchase an additional amount of life insurance.

Each cash addition is tax-deferred

Question 29

Dividend Option - Paid up Insurance

Answer 29

Applied to the annual premium and are enough to pay the entire annual premium.

Question 30

Dividend Option - One Year Term Insurance at attained age

Answer 30

The dividend may be used to buy one year term insurance equal to the policy’s cash value

Question 31

What is a Nonforfeiture Clause?

Answer 31

Allows for the insured to receive all or a portion of the benefits or a partial refund on the premiums paid if the insured misses premium payments, causing the policy to lapse

Question 32

What are the three Nonforfeiture Options?

Answer 32

1. Cash Surrender
2. Reduced Paid-Up Insurance
3. Extended Term Insurance

Question 33

Nonforfeiture Options - Cash Surrender

Answer 33

The policy is cancelled and the policyowner receives the current cash value

Question 34

Nonforfeiture Options - Reduced Paid-Up Insurance

Answer 34

The policyowner obtains a reduced amount of paid-up whole life insurance based on the insured’s attained age and the amount of guaranteed cash value available to buy a single premium policy. The policy will pay the reduced death benefit whenever the insured dies.

Question 35

Nonforfeiture Options - Extended Term Insurance

Answer 35

The net cash surrender value is used to buy a term insurance policy with a death benefit the same as the original whole life policy and is based on the insured’s attained age.